Category: Economics

Categories
Economics

[2339] The context of wealth inequality matters

Wealth inequality can be worrying. That does not mean all wealth inequalities are worrying. The concern for inequality in this sense is overblown. Up the Gini coefficient and the trumpet is blown to sound the alarm without accounting for its context.

One out of a few ways wealth inequality can be worrying is when a small fraction of the society owns almost everything while the rest lives under abject poverty. For the majority, they are threatened by starvation almost every day. They have limited access to education and medicine. Their chance to escape poverty is close to zero.

This is a case when there is something in the economy preventing the rest from having their welfare improved. It could be poverty itself twisting the incentive system to encourage individuals to focus on current consumption rather than investing for the future (it is hard for kids to think about ABC when the stomach is growling), dictatorship (it might be the interest of the leadership to suppress the masses through heavy taxation), slavery or really, anything.

In this case where wealth is monopolized by the very few, total and average wealth of a society does not reflect the actual welfare of the society. If one wants to be precise, perhaps the welfare of the median member of the society. Take the rich outliers out and only then total and average wealth begin to reflect societal welfare.

Note that what is worrying here is not the inequality itself. It is the factors that make such inequality possible in the first place. The solutions can be interesting but that is not the reason I am writing this.

What I want to demonstrate is a situation when wealth inequality is not a concern. It is a case where the top fraction of the society disproportionately owns more than the rest of the society, but the rest lives rather comfortably — they can afford to own cars, they can afford to obtain a certain level of education, they eat well, etc. The median lives a comfortable life.

The wealth inequality of the society, however unequal wealth is distributed, does not say anything about the welfare of the society. Take the rich outliers out and total and average wealth will give a message that the society is doing pretty well.  In this sense, inequality is not a concern.

The point I wish to highlight is that inequality by itself is not necessarily a concern. What makes it matters, or not, is the context.

For those who place too much concern on inequality, especially on the Gini coefficient, I have a feeling they are not accounting for the context.

Categories
Economics

[2335] Free trade in rice is good for Malaysia

The Food and Agriculture Organisation recently warned food prices are at record levels in both nominal and real terms since the entity first published its Food Price Index in 1990. The International Monetary Fund stated this is unlikely to be a temporary trend.

Rice generally has not shown the kind of increase exhibited by other foodstuffs, however. For Malaysia, where the majority considers rice a staple food, this is good news. Yet, it is probably just a matter of time before prices begin to increase.

Rice prices did hit outrageous levels in the past years. In 2008, it rose so high that it triggered some kind of a panic in a number of rice-consuming countries.

In Malaysia, shortage was reported in some places. The Abdullah administration tried to address the concern by purchasing an emergency supply from Thailand.

Implementation of rice exports ban by several of the world’s largest exporters of rice exacerbated the increase in price. Two particular countries that imposed the ban were India and Vietnam. Both make up more than 25 per cent of the world’s rice exports currently.

The impact of high rice prices, the role of rice as staple food and the implementation of exports ban are important while considering the following fact: According to the agriculture and agro-based industry deputy minister, imports fulfilled 30 per cent of Malaysia’s domestic rice consumption in 2010. Malaysia sources some of its rice supply from India and Vietnam.

The protectionist policy works for exporting countries by isolating domestic prices from international ones, if the goal is to have low prices in the domestic market. With less competitive demand for domestic rice, domestic prices will fall or at least it will not rise as fast as world prices given specific circumstances.

Governments around the world are aware of the adverse effects of high food prices for their respective society. Examples are aplenty.

In 2007, Mexicans took to the streets protesting against rising corn prices. Rising food prices — specifically bread — is partly fuelling the ongoing protests and revolution in the Middle East.

In short, at the macro level, a ban benefits the exporting countries at the expense of the importing ones.

What solved the issue of rising world prices was the financial crisis that began soon afterward. The protectionist policy gave way to other pressing concerns.

The respite from expensive rice is appearing to end. Eventually, the concern for rice supply and prices will take centre stage again and so will the protectionist policy of exports ban.

The concern is not theoretical. India continues to maintain an exports ban on non-basmati rice. Myanmar recently imposed a ban to slow the rising price.

For importers of rice, it is in their interest to have exporters remove the exports ban. That will mitigate the rise of global prices. This is a concrete example of how free trade benefits Malaysians and how protectionist policy hurts.

There is a silver lining to all this, if it could be called that. Rising prices coupled with the prevalence of exports ban is causing countries like Malaysia to boost its own rice production. Yet, a domestic production boost is at best a second best alternative to the free trade scenario.

The free trade scenario is cheaper in terms of opportunity cost. Trade enables specialization and that frees up resources for other more productive endeavors that Malaysia might embark upon.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on March 24 2011.

Categories
Economics

[2334] Sabah, immigration and unemployment

There is a popular allegation that illegal immigration, or even immigration as a whole, is the culprit behind the level of unemployment Sabah is experiencing. I am unsure how accurate that is.

First of all, while the unemployment rate of Malaysia nationwide was about 3.6% in 2009, the unemployment rate in Sabah was 5.5%. The difference is not too big.

Secondly, I think the allegation is mostly due to bias against immigrants in Sabah. Immigrants are simply easy scapegoats.

I recently came across statistics pertaining the labor market of Sabah. Here is a simple graphical representation of the behavior of labor force size and unemployment rate from 1982 to 2009.

The labor force is measured in thousands.

Here is a graph with change in labor force instead of just labor force size.

Note what happens to the unemployment rate each time there is a spike in change of the labor force.

The only edit I did to the data was to fill in two data points into the series, which are absent from the original dataset. The edit is innocent: I took the average of the year before and after for the missing points, which are year 1991 and year 1994.  The data is publicly available at the Department of Statistics.[1]

I drew the particular period because those are the years available in the document. There are not too many data points to play with.

I admit that that is unscientific but the graph shows that the increase in labor force corresponds with a noticeable drop in the unemployment rate. Something happened there. Was it the roaring nineties? Maybe but I really do not know.

The increase in labor for is likely due to immigration (legal immigration, by definition, I would guess). It is highly unlikely the nearly 300,000 or 35%  increase in labor force between 1995 and 1996 was due to natural factors. It was likely due to increase in immigration. There has been allegation that immigrants were granted citizenship status liberally in Sabah. This might be a smoking gun.

In that way, I am using the change in labor force as a very imperfect proxy. Nevertheless, I think the change in labor force is a somewhat good proxy. A sudden change is likely to be caused by immigration, given the history of Sabah.

I ran a simple regression just to see if preliminary results (i.e. no cointegration tests although the model did pass a structural test; simple reading of the results also suggests that there relationship is not spurious but residuals are not normally distributed) would go against the conclusion one would get from the graph above.

I found a significant relationship between the labor force and the unemployment rate: An increase in labor size reduces unemployment rate. Through the proxy I mentioned, the conclusion might be that immigration reduces unemployment rate, on average given all else constant.

One reason this might be true is that there are more economic activities with larger working population. I do not think that is controversial at all.

So, it does not support the allegation that immigration adversely affects the unemployment rate in Sabah. I would assume that the conclusion would hold for illegal immigration.

A better model would probably include the periods of economic expansion and recession as well as the GDP in one way or another. Having actual number of immigrants would be great. Looking for the GDP of Sabah up to 1982 might a little bit time consuming for a blog entry. If any of you have it, do send it my way. I might do a more kosher regression model with it.

Of course, it is quite possible that the relationship is reversed but again, given the history of Sabah where massive immigration was welcomed due to political consideration, I think this is more of a case where immigration affecting unemployment rate.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — see Principal statistics of the labour force, Sabah, 1982-2009 by the Department of Statistics Malaysia.

Categories
Economics

[2333] A story that is likelier better than deposits battle narrative

I had some trouble reading an article on the front page of the business section of The Star dated today. The headline “Battle for deposits” roars to tell the world that Malaysian banks are in the battlefield sword in hand fighting for deposits, especially for current accounts.[1] I find the whole idea somehow unconvincing. I could not quite finger it but there was something definitely missing from the picture. I wanted to roar back and so I gave it a thought. And I think I have got it.

The article reasons that with the overnight policy rate increasing, these deposits offer cheap source of financing for banks. It sounds fine until one asks, why are the owners of funds putting their cash in low yielding accounts? Hmm…

That is a far more interesting issue at hand than the alleged battle for deposits. I will come back to this.

But first, I did some calculation after mining the relevant data from BNM just to satisfy this weird curiosity of mine. Compare the graphics produced by The Star…

…with this longer period time series that I produced using the same data:

As you can see, the rate 11% is rather typical for the past 10 years for deposits in current accounts. Annual growth rate between 2001 and 2010 is close to 13%. So I am wondering if the proof of 11% offered is any proof at all.

Maybe, there is a battle for deposits. Maybe, there is less wealth around and so these banks have to work harder than usual, thus the battle for deposits. Maybe but I am skeptical of it. Even if it is true, like I said, there is a more interesting issue at hand.

Another point that does not run parallel with the deposits war story is the drop in savings deposit growth rate. The average annual growth rate for savings deposits is 8%. If 11% annual growth rate of deposits in current accounts that is really around average paints the picture of a battle, what about 3% rate for savings that is well below average?

I have a more interesting and a likely more consistent story to tell.

I think the whole issue is a symptom of economic recovery. It might be an affirmation of economic recovery.

The continuing growth of deposits in current accounts suggests that there are more transactions going on. The drop in savings deposit suggests that individuals and companies might be using the money or putting it somewhere else with better returns rather than keeping it relatively idle. Companies might have purchased more supplies for sales or invested more, while individuals might have gone spending somewhere. More spending, less saving.

What adds to the plausibility of the story is that in 2008, growth rate of deposits in current accounts slowed. The recent financial crisis began in 2007 while the full realization that we were in trouble only became clear in 2008. That hit confidence and many began to hoard money. That meant harder business environment and less transactions. Since current accounts are typically used for business transactions, deposits in current accounts should not grow too big, or should even shrink. Look at the growth rate in 2008: 6% compared to 23% the year before and 11% the year after.

Here are a few things that may strengthen the story further. One, increasing sales and investment figures for companies. Two, increasing private consumption for individuals. Three, higher velocity of money.

Anybody wants to check that? I am going to bed.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — PETALING JAYA: Banks are engaged in a war for deposits, especially for current accounts, in their drive to build up low-cost deposits as a means of cheaper funding.

“Demand deposits (current account), which were relatively much cheaper than fixed and savings deposits, had been marking a strong year-on-year (y-o-y) growth of about 11% from 2008 to 2010,” RAM Ratings head of financial institution ratings Promod Dass told StarBiz.

”This clearly indicates the drive among banks to build up low-cost deposits for access to cheaper cost of funds. This active strategy of promoting current accounts usually involves corporate clients who utilise the service for their businesses,” he said.

According to Dass, this was in line with the increasing overnight policy rate (OPR) where the average deposit rate had risen since 2009. [Battle for deposits. Sharidan M. Ali. The Star. March 14 2011]

Categories
Economics Society

[2326] Conspicuous consumption in the train

When I first read Veblen’s The Theory of the Leisure Class, I found the idea of conspicuous consumption a bit ridiculous. In the book, he argued that individuals consume for the purpose of signalling his wealth. Wealth as a signal evolved from prehistoric social structure.

During barbarian times, what Veblen called successful exploits — primarily war but later as society became peaceful and orderly, through business — brought the great spoils to the victors. Success brought status and wealth. The society soon used wealth as a signal of success that brought status, while taking the causal relationship for granted. Slowly, it did not matter whether one is successful or not. Only wealth matters. Wealth differentiated individuals into classes.

Wealth is observed through either consumption or leisure. Long story short, through further evolution, the whole society in the end engaged in consumption to signal wealth and status. All that matters in the end are consumption. If one consumes some minimum level of goods or leisure, then one is accorded with some kind of respectability by the wider society.

Veblen called it conspicuous consumption and conspicuous leisure. It is conspicuous because individuals consume goods and leisure to — to put it crudely — show off.

As I said, I found the whole concept ridiculous initially. It could not be that we all consume to show off in conscious manner. After awhile however, I started to warm up to Veblen’s idea though there were some reservations, mostly because I accepted that there are individuals who engage in this type of consumption. After all, there is such a thing as a Veblen good. For example, a Ferrari. One of the reservation I had was not all consumptions are principally due to signalling. There are consumptions made out of necessity, even in a rich society. Even so, a majority of consumption of items that might be labelled as luxurious are done simply because individuals enjoy such consumption, not because they want to signal their status in a conscious manner.

That opinion of mine later changed.

While I was in Sydney, a majority of individuals, friends and strangers alike, had iPhone or iPod or anything Apple’s. Even I had one. Apple’s products were ubiquitous. It had become some kind of expected standard of consumption.

I only started to recall Veblen when I was riding a train in Kuala Lumpur. I did not see any Apple product, or at least, a majority did not own it. Consumption as a signal of wealth did function well in describing wealth difference between Malaysian and Australia societies.

As I switched on my iPod in the train, I kept holding it in my hand. I did that because I would like to control the player rather than allow it to randomize the songs for me. At one point, I asked myself, am I showing off in the way Veblen described more than a century ago? More question came to mind: what if whether one is aware that he or she is showing off is relevant? What if all of us are showing off, unconsciously?

Whether or not I was aware of the signalling, or regardless of my intention in consuming, I was effectively signalling my wealth, and arguably, status to others through my iPod.

I first read Veblen about five months ago. The first few months were a struggle that began with me trying to disprove Veblen. From disproving, I later tried to qualify his statements. In the end, Veblen won.